New Tool Ruling From IRS
Frequently, a construction firm will provide all the tools
required by its workers to "do the job right". But the firm might reimburse
workers for the cost of special tools they provide on their own. What are the
tax consequences of this practice? If certain requirements are met, the
reimbursements are tax-free to the workers, while the construction firm can
deduct the payments as business expenses.
To qualify for these tax benefits, the payments must be made
under an "accountable plan".The plan may be administered by the construction
firm itself or an independent third party. However, if the plan is deemed to be "non-accountable", the reimbursements are taxable to the employees and subject
to income and employment tax withholding.
In the past, the IRS has established that an accountable
plan must meet these three requirements:
- Reimbursed expenses may be deducted only if there is a
valid business connection.
- All reimbursed expenses are individually and adequately
accounted for to the employer within a reasonable time.
- Any amounts paid to an employee exceeding actual expenses
must be returned to the employer within a reasonable time.
If the plan fails to meet any of the requirements - if it
otherwise exhibits a pattern of abuse - it will be treated as a non-accountable
plan. Now a new ruling from the IRS Office of Chief Counsel provides more
insight.
Key facts: An employer had been compensating its employees
on an hourly wage basis without any specific amounts being attributed to the
provision of tools. The employer intends to participate in a tool reimbursement
plan administered by a third party. How it works: Each employee's hourly wages
are divided into a reduced hourly wage and he or she receives a payment based
on the percentage.
Under the tool reimbursement plan, an employee would receive
two checks, one covering the reduced hourly wage amount and the other the tool
plan payment. The second check would be exempt from employment taxes. After an
employee receives an amount equal to the amount limited by the employer's tool
inventory, the employee would no longer receive reimbursements. Payments will then return to the regular pay
structure.
The IRS said this type of plan violates the "business
connection" requirement. Reason: An employer cannot structure its compensation
arrangement to avoid payment of employment tax by substituting reimbursements
and expense allowances for amounts that would otherwise be paid as wages. The
IRS determined that that there was no connection to expenses that would be
incurred (or reasonably expected to be incurred) during employment. Therefore,
the tool plan payments are subject to employment taxes.
Saving grace: The IRS has approved other tool reimbursement
plans in a variety of situations. Proper planning can avoid any adverse tax
consequences.
Contact
our Construction segment leaders for more information.
Ken Fulp, CPA at kfulp@sharrardmcgee.com or
Tim Hayworth, CPA at thayworth@sharrardmcgee.com
.png)
